The Securities and Exchange Board of India's (Sebi's) last minute decision to amend the takeover code may prove a blessing in disguise for UK based Diageo's $2.1 billion buyout deal for Vijay Mallya group's United Spirits Ltd. (USL). According to legal experts, it now only remains to be seen if the new norms come into effect from prospective or retrospective manner.
Sebi today said, "where the open offer obligations are triggered pursuant to an agreement or otherwise in combination of any modes of acquisition, the ‘relevant date’ for making public announcement and determination of offer price shall be the earliest date on which obligations are triggered. This will, however, not be applicable if the subsequent trigger is on account of willful and deliberate act on the part of the acquirer."
Legal experts say, such a clause is subjective and company promoters and acquirers will use it to their advantage to determine a date for open offer when it is triggered on account of willful and deliberate act on the part of the acquirer. Also, timing of the amendment is being questioned as such a proposal was not not there on Sebi's board meet agenda put out over a week ago.
The controversial issue with Diageo-USL deal was that acquirer announced an open offer even before it got triggered. The share price of USL saw a sharp up move post deal announcement in November 2012 and the open offer could have cost the acquirer more money had it been triggered at a later date. Daigeo made an open offer at the same price of Rs 1,440 at which it acquired the promoter stake. More, a clause in the deal gave Daigeo the first right of refusal to withdraw from open offer if the price was revised by Sebi. Experts said, this was unusual as trigger for open offer is irreversable and the clause was contingent upon regulator with a potential threat against revising the offer price, even if required as per law.
Sebi's another amendment to take over code too suits the Daigeo-USL deal. The regulator said, "date of board resolution authorizing the preferential allotment shall be the relevant date for the purpose of triggering open offer obligations and determination of offer price, instead of the date on which special resolution is passed under Section 81(1A) of the Companies Act, 1956."
Diageo agreed to pick up a majority stake in USL through a multi-structured deal. In a joint statement, Diageo said it entered into an agreement with United Breweries Holdings Ltd (UBHL) and USL to acquire a 27.4% stake in the latter at Rs 1,440 per share. Diageo was to acquire a 19.3% stake in USL from UBHL group and further transaction was based on contingent agreements, which were structured in a way that if one agreement fails to achieve the desired result, another was to be activated.
A mere purchase of 19.3% stake by Diageo in USL was not enough to trigger an open offer. The deal announcement said the acquirer would seek further approval from USL shareholders for a preferential allotment at Rs 1,440 per share of new shares amounting to 10% of the post-issue enlarged share capital of USL and it was a preferential announcement that could have triggered an open offer. USL shareholders approved issuance of fresh equity to Diageo in December, which then triggered the open offer against the one announced earlier.
The share price of USL rallied nearly 50% from the Diageo acquisition price of Rs 1,440 to touch a high of Rs 2,149 on the stock exchanges on November 29.
Sebi's reasoning in saying that board resolution date for preferential allotment will be the trigger date for open offer and not the shareholder approval of resolution is "the information about the impending preferential allotment comes into the public domain on the date of the board resolution which authorizes the preferential allotment and the market price gets adjusted or may even rise which exposes the transaction to market risks."